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When, if ever, is a residential mortgage not "residential" for the purpose of foreclosure?

Believe it or not, this question comes up from time to time in my practice (exciting life, I know). In recent years I have prosecuted many foreclosure actions, but only commercial foreclosures. So the first question I usually ask a colleague who comes to me with a foreclosure question is: "Is it a commercial or residential property?" When the answer starts with something like, "Well, that is actually an interesting question . . . " then I can almost guess what is coming next. Usually it is some variation of: "It is a home, but they mortgaged it to get money to start a commercial enterprise, so I want to argue that its commercial property." Unfortunately, you usually can't make that argument (at least not successfully), and the Appellate Division's recent decision in City National Bank of New Jersey v. Hodge reminded us all of that fact again.

To begin with, the differences between commercial and residential foreclosures in New Jersey are significant. Most importantly, commercial foreclosures are not subject to the Fair Foreclosure Act, including the various notice requirements that are required for residential foreclosures under the Act. Simply put, New Jersey law provides greater protections for residential owners who are about to lose their homes than they do for commercial owners who are about to lose their place of business. This means that the burdens on lenders seeking to foreclose on a residential mortgage are more demanding, if not entirely onerous.

Whether a property is considered residential or commercial depends on the nature of the property, not the nature of the loan or the purposes behind it. Under New Jersey law, a residential mortgage is one secured by "residential property . . . which is occupied, or is to be occupied, by the debtor . . . or a member of the debtor's immediate family . . . ." In Bank v. Kim, the Appellate Division rejected the argument that a borrower's intent to use the proceeds of a loan for business purposes can effectively convert a loan secured by a mortgage on the borrower's residence into a "commercial mortgage": "Clearly, the legislative language protects the interests of a homeowner whose residence is mortgaged, without reference to his or her reasons for the mortgage. We are not free to deviate from an unambiguous statute." Therefore, this issue is well settled, but that does not mean that it still doesn't come up -- in my office and in the courts.

In Hodge, the borrower took out a mortgage on the home she was living is so that she could purchase another home and make it her primary residence. When she moved into the second home, her son continued to live at the first home but did not pay rent. The lender argued that as soon as she moved to the second home and made it her primary residence, the first home became a commercial property. Therefore, the lender argued that it was not required to abide by the notice requirements of the Fair Foreclosure Act when it foreclosed on the first home.

The trial court agreed, but the Appellate Division reversed. It held that the mortgage on the first home was a residential mortgage because: (1) the borrower's son continued to live there (and the definition of "residential mortgage" in the Fair Foreclosure Act includes property where the debtor "or a member of the debtor's immediate family" lives); and (2) the borrower's reasons for acquiring the mortgage were irrelevant to determining whether it was a commercial or residential mortgage. Accordingly, the Appellate Division remanded the case to the trial court so that it could "proceed in the ordinary course under the [Fair Foreclosure Act] as determined by the judge." (In other words, the Appellate Division was not dictating to the trial court what remedy it must impose for the lender's failure to follow the notice requirements of the Fair Foreclosure Act.)

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